It developed entirely new food processing methods

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The burger conglomerate’s special relationship with its suppliers has a unique history. As McDonald’s Chairman Fred Turner expanded the chain in the 1970s, he came across a supply hurdle. The traditional food processing biggies of the industry were either unwilling or unable to supply the food goods that McDonald’s demanded. So, as journalist John F. Love points out in his book - McDonald’s:Behind the Arches – “It developed entirely new food processing methods” by relying on small suppliers. Over the years, the system’s suppliers have grown into some of the world’s largest food processors. Keystone Foods is now a $1billion company and the largest producer of hamburgers in the world; Jack Simplot has become the french fry king of the globe and Schreiber Foods supplies over 65% of the cheese consumed by McDonald’s annually. All these guys did was to shake hands with McDonald’s pioneer Ray Croc in the 1960s & ‘70s and the rest is history.

Decades later, when McDonald’s decided to hit the Indian market, it took them six years (and an investment of Rs.4 billion) to put their supply chain in place. The abundant caution seems to have paid off as today, it’s the only QSR brand in the country that has never been disrupted due to inadequate flow of products or lack of suppliers. The slowdown may be forcing some fast food chains in India to shut down loss-making stores, but McDonald’s is certainly not among them. As was the case globally, the key suppliers for McDonald’s even in India were relatively little know players till about a decade ago. Dynamix Dairies in Baramati (Maharashtra), for example is the key supplier of cheese to McDoanld’s restaurants and began as a largely cooperative movement in 1995. Schreiber, McD’s global cheese supplier gave the initial technological help and Dynamix today has become one of India’s largest dairy companies, with a more than 2.8 million lbs./day fluid line processing facility. Schreiber now also holds a 51% stake in the company. “We help our supply chain partners to grow along with us and even introduce them to our global partners for technological assistance and new processing methods,” explains Upadhye.

Besides, global supply partners like McCain (for frozen French fries) and Vista Processed Foods (for lettuce) have also entered India over the past few years. “McDonald’s helped us to come and set up our plant in India,” avers Jaideep Mukherji, Country Manager, McCain Foods India, which also supplies to Yum! Brands and Nirula’s. The reason why these suppliers have even caught the fancy of rival food chains is because of their quality and reliability. So how do they maintain the exclusivity of McDonald’s success recipe, we asked Vista, which is also a vendor for other 5-Star hotels. “Whatever we are manufacturing for McDonald’s, its exclusively for them and we don’t share it with anyone,” reverts Bhupinder Singh, CEO, Vista Processed Foods. When we visited the McDonald’s sprawling distribution center – run by Radhakrishnan Foodland (another vendor!) – located in Greater Noida, cartons of buns, cheese and eggs were lined up in sub-zero temperature (to lock nutrition), each labelled ‘Made for exclusive use of McDonald’s.’ In fact, McDonald’s is the only QSR chain that has a standing record of having the same logistics partner – Radhakrishnan Foodland Pvt Ltd - for more than a decade.

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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Though exchange-operated currency futures are still at a nascent stage in India, it can go a long way in helping us duel with global risks and uncertainties

Although a risk management system to hedge the currency risk has long existed in India in form of over-the-counter (OTC) market, the ever-increasing frequency and scale of risk exposure has necessitated a more transparent and efficient mechanism in the country. To overcome this problem government decided to allow futures trading in currency beginning August 2008. Currency derivatives trading picked up since then beating the expectations of many.

The country’s derivatives turnover for 2007 was about 29 times its national commerce estimated at $440 billion. Though this is a significantly large figure, it falls fairly short of the size of the global derivatives market that was 40 times the international commerce of over $63 trillion in the same year.

The large size of the Indian derivatives market is very much commensurate with the country’s ever-growing exposure to various global risks, high price volatility, and an increased number of asset classes such as equities, commodities, and currencies. In this context, it is pertinent to look at the scale of risk only the traders are exposed to in terms of the price and exchange rate volatility. India’s international commodity trade for 2007-08 stood at more than $272 billion. With an annualised volatility at 14% as found in the composite index of prices (COMDEX) and 6% volatility in Indian rupee during the same period, Indian traders were exposed to a massive risk of $55 billion/annum due to commodity price and exchange rate fluctuations. It is quite evident that the unhedged positions with regard to either type of risk would mean a big blow to the competitiveness of traders. The recent development involving the palm oil importers amply illustrates this. The importers were caught on the wrong side of the fence by a sudden crash in the international benchmark prices by the time the forward contracts they had entered into matured for delivery. No wonder, they ended up defaulting on their import obligations, thus hurting their credibility in the global market.

The incident emphasises the need for hedging both price and exchange rate risks efficiently in order to stay competitive. As for hedging against the price risk, an efficient risk management instrument in the form of commodity futures has been available since 2003, thanks to the burgeoning growth and spread of the country’s online national commodity exchanges. However, despite a huge daily turnover of $34 billion in the OTC market, until August 2008 when the futures trading in currency was started, there had not been a transparent and efficient hedging avenue for entities facing the risk of exchange rate fluctuations.

The exchange-traded currency futures overcome many of the flaws that plague the OTC market. First, the exchange-traded currency futures offer a single quote for a specific contract to all the participants at any given point of time, while in the OTC market contract prices vary depending on the relationship between the issuer and the client. Second, the cost of trading at these fully transparent exchanges is relatively low. The high liquidity build-up on these state-of-the-art electronic exchanges, through the leveraging of their robust technology and best risk management practices, results in lower cost of participation and more efficient price discovery. Additionally, the counter-party-risk, which is a major limitation of the OTC market, is fully taken care of by the exchange operated derivatives.

These are, however, still very early days for the exchange-operated currency futures in India and the market has a long way to go. As they evolve along the way at par with other derivative markets, and as participation and product portfolio grows with the likely permission for the participation of increased number of heterogeneous stakeholders to come on board on the exchange platform attracted by relevant products, the benefits to businesses and the economy would multiply. No doubt, strengthening derivative markets would also make us more confident in taking on one of the major challenges of an open economy i.e. spreading global risks, in a seamless manner.

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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